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Activity-based costing application methodology for manufacturing industries

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ACTIVITY-BASED COSTING APPLICATION METHODOLOGY
FOR MANUFACTURING INDUSTRIES
Boris Popesko
Introduction
Despite the fact that issues relating to Activity-
-Based Costing (ABC) have been widely discus-
sed by researchers and practitioners in the past
ten years, this modern concept still lacks general
rules governing both methodology and cost
allocation principles. Looking back, the concept
of Activity-Based Costing has been considered
a sophisticated method of cost calculation since
the early 1980s. The ABC method was originally
designed as a solution to the limitations of tradi-
tional costing methods. The problems relating to
these traditional costing methods have been wide-
ly publicized in recent decades, the context being
the need for improvement in the quality of costing
systems actually utilized in practice. However, one
challenge faced when carrying out the cost alloca-
tion procedure in ABC lies in the manner in which
the methodology is applied. When allocating
costs in adherence to ABC principles, the user of
the system also has to strictly follow the individual
steps within the implementation methodology,
where clearly defined allocation procedures and
other methodical acts are performed.
In the last few years, the author has spoken to
individuals from many businesses, who expressed
their discontent with the quality of their present
costing system. Most of them expressed an inte-
rest in the area, but were skeptical about whether
the ABC system is actually able to solve most
of the important challenges relating to cost ma-
nagement in companies. The enthusiasm which
accompanied the first-stage implementations of
the ABC method in the 1990s had, unfortunately,
turned to partial disenchantment by the beginning
of this decade. The ABC system is very often seen
as an expensive, luxurious system for gathering
detailed descriptions of processes, activities,
and product costs but one lacking any clear and
tangible benefits.
This research study has no ambitions to judge
the expediency of the ABC system for recent or
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EKONOMIKA A MANAGEMENT
future users. In fact, the aim of this paper is to
definitively explain the necessary steps to apply
ABC, as well as to clarify procedures for activity
output measurement and cost assignment.
1. Literature Review
1.1 Emergence of the Activity-
-based Approach
The ABC concept was designed as a method
which eliminates the shortages of the traditionally
used absorption costing methods. Those shorta-
ges or limitations had been very closely descri-
bed in the scientific publications [4], [10], [20],
[21]. The effect that plays a role in determining
an inaccurate overhead cost allocation could be
described as ‘averagization’[15]. In other words,
the end result of allocating a proportionally avera-
ge volume of costs of any type to all cost objects.
The problem of what here is termed ‘averagiza-
tion’, is also very important in companies with
a very sophisticated system featuring cost centre
overhead rates. Even if several different overhead
rates for different overhead cost pools are used
to improve the quality of cost assignment, the
basis is still the same – the direct costs. If the
basis is only set to the easily measured amount of
direct costs, it is not possible to achieve accuracy
in cost assignment, because the true causes of
cost consumption frequently have a natural base.
The absorption costing method could distort
product costs because it allocates overhead
costs proportionally to the portion of direct
costs. Glad and Becker [5], identified a number
of fundamental limitations in traditional costing
systems:
• Labor, as a basis for assigning manufacturing
overhead, is irrelevant as it is significantly less
than an overhead and many overheads do not
bear any relationship to labor costs of labor
hours.
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 EKONOMIKA A MANAGEMENT
• The cost of technology is not assigned to
products based on usage. Moreover, direct
(labor) cost is replaced by indirect (machine)
cost(s).
• Service-related costs have increased consi-
derably in the last few decades. Costing for
these services was previously non-existent.
• Customer-related costs (finance, discounts,
distribution, sales, after-sales service, etc.)
are not related to the product’s cost objects.
Customer profitability has become as crucial
as product profitability.
In some instances, especially when a company
has a very homogenous output, few departments
with overheads and customers are very similar in
nature, the absorption costing method should
provide very accurate outputs, despite its limita-
tions [21]. The absorption costing method boasts
one very important advantage - it is very simple to
put into utilization. All the information the user has
to gather together can be found in accounting
books or product material and labor sheets.
Kim and Ballard [11] defined the problems
that can result from using traditional methods of
overhead costing as:
• Cost distortion hinders profitability analysis,
• Little management attention to activities or
processes of employees.
The logical solution of registered disadvan-
tages of traditional absorption costing systems
was to develop a costing method which would
be able to incorporate and utilize cause-and-ef-
fect instead of widely applied arbitrary allocation
principles into the company costing system [4],
[12]. In this situation, when the portion of overhe-
ads exceeds 50% of total company costs and the
company is using single measures for allocation
of overhead costs to the cost objects, the risk of
an incorrect product or customer costs calculati-
on becomes significant.
Following the 1970s, there was a general
realization of the limitations in traditional co-
sting systems. Greater competition and further
inaccuracies in costing products effectively
encouraged businesses to seek out alternative
methods, ones offering far more transparency
and enabling accurate and causal cost allocati-
on. It was then, at the dawn of the 1980s, that
the Activity-Based Costing (ABC) method came
about, being quickly adopted by enterprises of
strana 104 1 / 2010
many and various types. The spread of ABC
owed a significant debt to advances in compu-
ting and IT thereby permitting practical utilization
of ABC principles.
The Activity-Based Costing method is a tool
which could bring about significant improvement
in the quality of overhead cost allocation. The
ABC process is able to incorporate both physical
measures and causal principles in the costing
system. The basic idea of ABC is to allocate
costs to operations through the various activities
in place that can be measured by cost drivers. In
other words, cost units are assigned to individual
activities, e.g. planning, packing, and quality con-
trol using a resource cost driver at an initial stage
with the costs of these activities being allocated
to specific products or cost objects in a second
phase of allocation via an activity cost driver.
Activity-Based Costing methodology has been
described by many authors [4], [5], [9], [21]. The
ABC process could vary from simple ABC, using
only one level of activities to expanded ABC,
comprising various levels of activities and al-
lowing for mutual allocation of activity costs [2].
Nevertheless, it should be noted that the ABC
approach is not a truly revolutionary or a comple-
tely new means of allocation. In essence, it has
transformed the logical relationships between
costs and company outputs entering a costing
system. Indeed, ABC has incorporated logical
allocation procedures from costing systems pre-
dating its own complex methodology.
1.2 Implementation Methodology
Together with the emergence of ABC metho-
dology, issues relating to its practical utilization
and implementation have been presented by both
academics and practitioners. At this point, it is
necessary to distinguish between two diverging
approaches addressing ABC system implemen-
tation. The first considers implementation merely
in terms of performing an ABC calculation and is
primarily focused on the system’s construction,
cost flow, and allocation procedures. Drury [4],
defined the necessary steps to set up an ABC
system as follows:
1. Identifying the major activities taking place in
an organization.
2. Assigning costs to cost pools/cost centers
for each activity.
3. Determining the cost driver for every activity.
E + M EKONOMIE A MANAGEMENT

4. Assigning the costs of activities to products
according to their individual demands on
activities.
These are described by other authors in a very
similar manner. For example, Staněk [21], consi-
ders adjusting accounting input data as the initial
procedure in building the system. Furthermore,
he prescribes the fourth step of implementation
as calculating the activity rate, which is defined as
an activity unit cost.
The above-defined steps of system design
could be considered as a very brief overview for
successful implementation process. Some other
authors define much more detailed application
procedures [5]. The steps in the ABC application
methodology are:
1. Determine the nature of costs and analyse
them as direct traceable costs, activity tra-
ceable costs and non-traceable costs (or
unallocated costs).
2. Account for all traceable costs per activity, di-
stinguishing between primary and secondary
activities.
3. Identify the company’s processes, activities
and tasks, and create process flowcharts.
4. Determine cost drivers for each activity and
use output measures to calculate activity re-
covery rates.
5. Trace all secondary activities to primary
activities, so that the combined activity rates
include all support costs.
6. Identify which cost objects are to be priced.
Compile the bill of activities for each cost
object.
7. Multiply the activity recovery rates by the
quantity of output consumed as specified in
the bill of activities. The sum of these calcu-
lated costs will give the activity-traced cost of
the cost object.
8. Direct costs and non-traceable costs should
be added to the cost calculated above to give
the total cost of the cost object.
The other approach to ABC implantation not
only encompasses the structure, design of the
system, and tackles the question of how costs
are allocated in ABC, but also deals with issues
related to its implementation within an organizati-
on. In other words, the question of how the ABC
system must operate within an enterprise. This
approach considers all the necessary features
that have to be addressed in the process of
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EKONOMIKA A MANAGEMENT
setting up an ABC system. Many authors have
described implementation in great detail [2],
[5], [6]. The procedures they analyze are far
wider ranging than the steps involved in system
design because of the focus on organizational,
personnel, capacity, and effectivity issues of ABC
system building and utilization.
Probably the most important matter solved by
this approach to ABC application, which analyzes
performance during its set-up, is the question of
the efficacy of the future system. ABC usually
processes large quantities of financial and non-
-financial data. If we want to maintain the effecti-
veness of the system, it is necessary to ensure
that costs for obtaining that kind of the data do
not outweigh the benefits of the system. Should
this not be possible, the application of the sys-
tem is ineffective. Applying ABC brings different
benefits for different organizations. According to
the characteristics of the system, we can say that
putting the system in place would be effective in
organizations with a complex and heterogeneous
structure of activities, products, and customers.
Petřík [14] describes organizations with the most
to gain from ABC implementation as:
• those with a high frequency of different cost
objects – this presumption is valid for either
production companies, or for service or tra-
ding companies;
• those with a large portion of indirect and sup-
porting costs;
• those with a great number of processes and
activities.
2. Research Method Conducted
As the steps described when setting up an
ABC system seem rather too general for practical
usage, case studies were carried out so as to
define the detailed characteristics of design and
implantation. The resultant findings are based on
three projects of full ABC system implementation
conducted by the author’s research team in the
past two years. The organizations selected for
this purpose were three manufacturing compa-
nies from the plastics and automotive industries,
all with a relatively complex structure of products,
customers, and performed activities.
Table 1 gives an overview of the case studies
performed and the objects of these implementati-
ons. The quantity of product types and customers
is continually fluctuating, so the figures in the table
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are estimated and approximate values. The number
of activities represents the amount of the same as
defined within the model, these being designated
as either primary (p) or secondary (s) types. The
relative portion of overhead costs could be inter-
preted as fairly low when taking into consideration
the effect expected from implementing ABC [14].
The businesses in question handle a high quantity
of semi-finished supplies and components, the
value of which is considered as direct material
cost. The effective management of overhead costs
is desirable in spite of the final products being very
sensibly priced with very low profit margins.
Tab1: Overview of performed case studies (own research)
Case study/company 1 2
Industry Plastics
Number of employees 96
% of overhead costs 24%
Number of product types 200
Number of customers 40
ABC MODEL
Number of activities (p+s) 20+7
Widely recognized procedures governing
implantation, as described in section 1.2, were
those followed within the research projects. Gre-
at attention was paid to the design of the systems
and cost allocation procedures. Furthermore,
coherent issues relating to the effectiveness of
implementation were considered.
3. Major Findings
The first part of the ABC application process
was to define the appropriate hierarchy of steps
involved, these being:
1. A feasibility study and review; [5]
2. Identifying the major activities and cost ob-
jects within the ABC model;
3. Assigning costs to activities;
4. Calculating the primary rates of individual
activities;
5. Calculating the costs of defined cost ob-
jects.
These stages were worked out whilst the case
studies were being conducted. It became appa-
strana 106 1 / 2010
rent through practical implementation that it was
necessary to build upon Drury´s [4] elementary
methodology. Prior to planning the structure of
the systems, an important measure was a feasi-
bility study and review. This step is required in
order to analyze the effectiveness and impact of
implantation, as well as to identify all the features
and characteristics of a future system. The form
of ABC put in place also depends on the purpose
and information desired from it. The individual sta-
ges of the implementation process are described
in the following chapters.
3
Plastics Automotive
429 500
16% 25%
100 400
15 100
34+7 30+13
Source: own research
3.1 Feasibility Study and Review
As mentioned above, the main aim of this
phase of the ABC implantation is to define
the benefits it provides and the methods for
utilizing the outputs of system information, as
well as the costs relating to implementation and
operation.
The initial impulse for putting ABC in pla-
ce normally comes from the management of
a company. There is an expectation that one
will reap dividends through improved cost
management levels and the superior quality
of information provided by the system. The re-
asons senior managers consider going ahead
with implementing ABC could be discerned as
the following [16]:
• A high number of expensive overhead activi-
ties; plus construction, project management,
and maintenance;
• A relatively high portion of overhead costs;
• Intense competition;
• Invisible relations between customers’ pro-
jects and costs;
E + M EKONOMIE A MANAGEMENT

• An intention to reduce costs;
• Creating an effective tool for costing products
for sellers.
The anticipated benefits brought about by the
information outputs of an ABC system need to be
very carefully analyzed along with their features.
The essential problem is the difficulty of quantifying
the economic benefits of ABC implementation and
especially its impact on company profitability [21].
However, future users of the information generated
could, during this phase, define the contribution of
the same for their own purposes. Implementation
of the system will require considerable effort and
expenses and it should be questioned whether or
not it will add value to the business. Information
overload as well as the capability of the manage-
ment team to absorb the content of the system will
certainly be factors to consider in this respect.
Beside the ABC benefit analysis, the cost analy-
sis of ABC implementation has to be made within
this phase of implementation. The feasibility stu-
dy should look at the normal cost considerations
which can be summarized as follows [5]:
• Development costs:
◦ outside assistance;
◦ internal staff costs;
◦ ABC/M system costs (costs for purcha-
sing of ABC IT system);
◦ support system changes.
• Operating costs:
◦ capturing costs (costs of data capturing);
◦ system running costs;
◦ interpretation costs.
3.2 Identifying the Major Activities
and Cost Objects within the ABC
Model
Many authors [4], [5], [21] consider the definition
of activities as the starting point of an ABC imple-
mentation process. As was witnessed after perfor-
ming the case studies, creating a single definition
for activities without the cost objects being also
defined proved insufficient for successful imple-
mentation. The structure of activities can be related
to the cost object structure because different data
are processed and various outputs are desired of
the individual cost objects. Consequently, it is ne-
cessary to split this phase of ABC implementation
into two coherent sections: i.e. defining activities
and defining cost objects.
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EKONOMIKA A MANAGEMENT
Activity definition
Activities form the basis of measurement of all
relevant information in an ABC system. Therefore,
it is imperative to define the activity at the right
level of detail. Too much will cause information
overload and too little may lead to insufficient
information being available for analysis. Several
procedures defining activities may be used:
• analysis of the organizational structure of an
enterprise;
• analysis of the workplace;
• analysis of personnel costs.
Applying all three ensures that no activity is
overlooked.
Moreover, several important guidelines relating
to an activity’s definition can be composed as
follows:
• Every defined activity should be related to
a relevant cost pool; the objective of activity
definition is not to conduct process analysis,
but to set up the costing system.
• Actions and tasks performed within an activity
should be precisely described to avoid any mi-
sunderstanding in later stages of application.
• A code number may be allotted to all indivi-
dual activities for easier processing.
• It is suitable to define the appropriate number
of activities, totaling between 20 to 30.
Activities defined within the ABC system are
classifiable as either primary or secondary (sup-
port) activities. Primary activities might relate to
actions which the organization performs to satisfy
external demands, while secondary refers to
those performed to serve the needs of internal
“customers” [18]. This classification is essential
for cost allocation procedures, as described in
later chapters.
The Porter model could prove useful as
a framework for an activity structure especially
suited to manufacturing industries. The activities
identified might also be collated within aggregate
processes, which could relate to specific cost
objects.
Cost object definition
Traditional costing methods normally utilize
a single cost object – a product or service. Howe-
ver, an effective and accurate costing system has
to incorporate multiple cost objects. Distinct
products and services usually comprise the most
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 EKONOMIKA A MANAGEMENT
frequently used cost objects. In reality though, it
is possible to discern a much wider spectrum of
cost objects. Using multiple cost objects makes
costing systems far more complex, but this prin-
ciple is an important requirement for accuracy.
How can one allocate the costs of a sales de-
partment right down to product level when the
inputs consumed by each customer served by
the department may vary widely, even if only one
type of product is produced?
The structures of both activities and cost
objects are very closely tied. This is why defi-
ning activities and cost objects in one phase
of implementation proved efficient. The close
bonds between an activity and a cost object’s
structure is also upheld by traditional classifica-
tions of activities, where every category of activity
is related to a different cost object. The activities
are classified as [9]:
1. Unit level activities, which are performed
each time a unit of a product or service is
produced.
2. Batch level activities, which are performed
each time a batch of goods is produced.
3. Product sustaining activities, which are per-
formed to enable individual products to be
produced and sold.
4. Customer sustaining activities, which are
performed each time a customer is served in
situations where the customer forms the cost
object.
5. Facility sustaining activities, which are per-
formed to support a facility’s general manu-
facturing process; these include administra-
tive staff, plant management, and property
costs.
The case studies performed demonstrate
the need to identify multiple cost objects as
the product, project (a special type of product,
produced for limited time), and customer which
is also true for manufacturing industries, the
reasons being:
• Industries serve a number of very different
customers, each of whom consumes diffe-
ring quantities of customer related activities
(costs).
• Individual projects (products) consume diffe-
ring quantities of product sustaining costs.
• The various products of projects may vary in
profitability, but the ultimate target is to reach
an appropriate level of customer profitability.
strana 108 1 / 2010
The ABC model should provide data for cost
object profitability measurement.
3.3 Assigning Costs to Activities
Assigning costs to activities represents the first
stage of the allocation process within the ABC
system. Firstly, not all company costs will be allot-
ted to the activities defined. Company costs could
be classified according to their nature under [4]:
• Direct traceable costs – those allocated
directly to a cost object using the same prin-
ciples as traditional costing methods.
• Activity-traceable costs – those allocated to
identified activities.
• Non-traceable costs (or unallocated costs),
which could be allocated to a cost object in
proportion to other costs, or may be covered
by a small increase in the target margin.
Cost allocation to defined activities might pro-
ve very complicated in practice and eventually
take up an important amount of the implementati-
on process time. The reason is that the structure
of activities and structure of a company’s de-
partment usually clash somehow. The activity
cost matrix could be invaluable for assigning
company costs classified in company cost cen-
ters to activities. Very often it is necessary to de-
fine a resource cost driver in order to effectively
allocate such costs. Resource cost drivers help
to assign costs to a specific activity, when the
cost in evidence is aggregated in general book
entries. The following resource cost drivers were
used in the case studies:
• Personnel workload – for allocating person-
nel costs to activities.
• Square meters – for allocating rent, premises
depreciation, heating, and indirect electricity
to activities.
• The quantity of machines, tools, etc.
• Estimation.
Assigning costs to activities could be useful
also as the effective tool for outsourcing deci-
sions, which could be considered as the one of
the subsidiary effect of the ABC implementation
process [4, 19]. In performed case studies, the
importance of this phase of ABC implementation
and its adjacent effects was equal to the primary
target of system application, i.e. more accurate
product costing.
E + M EKONOMIE A MANAGEMENT

3.4 Calculating the Primary Rates
of Individual Activities
Calculating the primary rates of individual activi-
ties can be conducted in four steps:
1. setting appropriate activity cost drivers for
individual activities,
2. determining the output measures of indivi-
dual activities,
3. calculating the primary rates of individual
activities,
4. assigning the costs of support activities to
primary activities.
Setting appropriate activity cost drivers
for individual activities
Activity cost drivers (ACD) can be defined as the
factors of transactions that are significant determi-
ners of costs [3]. Activity cost drivers should gene-
rate data about which factor causes the occurrence
of the individual types of overhead costs gathered
within an activity. ACDs consist of three types [4]:
1. transaction drivers (number of transactions),
2. duration drivers (amount of time required to
perform an activity),
3. intensity drivers (direct charge of consumed
resources to activities).
The ACDs defined for a manufacturer may
potentially resemble the allocation bases utilized
by traditional absorption costing, particularly for
manufacturing activities where duration drivers
are used. However, should a large portion of
direct costs and those of manufacturing activity
exist, the use of the ABC system solely for the
purposes of quantifying costs of product cost
objects might not be efficient.
A highly important requirement for a defined
cost driver is the ability of an enterprise to me-
asure the driver and quantify its output measure.
If the quantity of a cost driver consumed by an
enterprise and individual cost object cannot be
gauged, such a cost driver cannot be used for
cost allocation purposes.
Occasionally, a cost driver might take the form
of a determiner of cost variability. This means
that if a company performs a lower number of
activity units, the total costs of an activity will
change. In such instances, regress and corre-
lation analysis may be used to determine an ap-
propriate activity cost driver. Nevertheless, it is far
more common for activity costs to be largely fixed
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EKONOMIKA A MANAGEMENT
in character. Under these circumstances, a cost
driver is simply a gauge of cost allocation.
Determining output measures of individual
activities
The next step in the ABC implantation process
is to determine the output measures of individual
activities. These represent the number of activity
units consumed during a specific period. In fact,
an output measure determines activity capacity
and is used to work out activity unit costs.
The most significant provision governing
activity capacity measurement is that of setting
the correct activity capacity, this capacity being
determined by the level of its denominator. The-
se denominator levels are frequently applied in
manufacturing operations where capacity can
be technically and very precisely measured. In
the case of overhead activity measurement, the
setting of appropriate denominator levels could
prove more complicated because overhead
activities usually no have technical parameters
that might easily be gauged. The capacity of
overhead activities is usually measured by wor-
king out the number of output measures within
a cost period.
Output measures are, in the ABC system, used
to determine the recovery rate of each cost pool/
activity. Two alternatives exist for this purpose
[5] actual output, which uses the actual output
of a particular output measure, and maximum
capacity, which sets the constant capacity level
for each activity.
Generally, calculating activity recovery rates
based on actual output could prove easier to
perform, since no maximum capacity determi-
nation is necessary. Calculations based on the
maximum capacity are more accurate and provide
for greater possibilities of utilization, e.g. capacity
purposes. The challenge is to work out how to
set the maximum capacity of overhead activities.
Calculations based on the maximum capacity be-
side above mentioned facts enables the effective
capacity measurement and calculation of unused
capacity costs, wastage and other issues related
with the production and technological processes
[8], [20].
Calculating the primary rates of individual
activities
Activity capacity output measures are used for
quantifying activity unit costs, the rate for which is
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 EKONOMIKA A MANAGEMENT
calculated as follows:
Activity cost
Activity cost per unit =
Output measure capacity
(1)
Activity cost per unit, also called primary rates
could be then used in the ensuing stages of ABC
implementation as important measurements,
which could be analyzed.
Assigning the costs of support activities
to primary activities
Following the calculation of primary rates, the
next thing to do is to allocate secondary activities
to primary ones. It is possible to solve all of the
problems relating to secondary activity costs if
the amount of secondary cost driver units can
be quantified. These are consumed by indivi-
dual primary activities, such as the number of
employees, SAP licenses and square meters
being consumed by a primary activity like ‘Qua-
lity Control’. The costs of secondary activities
are then allocated to primary activities using the
output measures of secondary activities, thereby
calculating the secondary activity costs of prima-
ry activities. Total primary activity costs are then
worked out by combining the primary activity cost
(cost pool) plus secondary activity costs (costs of
secondary activities allotted to a primary activity).
An identical calculation can also be performed
for activity unit costs, where the unit costs of an
Fig. 1: Example of mutually and self-consumed secondary activities in the cost model [17]
strana 110
activity (combined rate) are equal to the sum of
primary activity unit costs (primary rate) plus the
unit costs of secondary activities consumed by
a primary activity (secondary rate):
Total activity costs = Primary activity costs + secon-
dary costs of primary activity (2)
Unit costs of activity (combined rate) = Primary
activity unit costs (primary rate) + secondary unit
costs by primary activity (secondary rate) (3)
The difficulty lies in the fact that these secon-
dary activities and their output measures are not
solely consumed by primary activities but other
secondary activities, as well as by these activities
themselves (Figure 1). This problem has also
been discussed by some authors [7].
Figure 1 shows how any activities mutually con-
sume other activity outputs. If, for example, we
analyze the activity entitled Human Resources
Management (HRM), it is shown that this activity
consumes outputs of other secondary activities
as IS/IT, Finance & Accounting, amongst others.
These types of activities, providing as they do
additional outputs for other secondary activities,
may be described as reciprocal secondary
activities. Another challenge to be faced is the
self-consumption of activities. The HRM activity
provides services for other company depart-
ments and activities according to the number
of employees. Consequently, the number of
Source: [17]
1 / 2010 E + M EKONOMIE A MANAGEMENT

employees is chosen as the ACD for this activity.
However, this activity is performed by a specific
quantity of employees. According to allocation
principles, this activity (HRM) should be charged
by the specific costs charge, as calculated by the
activity primary rate and then denoted as other
activities. This type of secondary activity, which
consumes its own outputs, might then be entitled
a cyclical secondary activity, because mutually
consumed and self-consumed activities cause
a cyclical allocation of costs.
Managers and accountants facing such a chal-
lenge have to find a way of performing this type
of costing allocation, because the method in
which service costs are allocated can significant
affect product cost accuracy. The simultaneous
consumption of service department outputs is
a relatively well-known issue. The most common
means for allocating service department costs to
production departments [7] are the direct, step
and reciprocal methods. Allocation procedures
which also include and solve the self consumption
of activities could be used. One such method was
also used in the case studies we conducted [17].
3.5 Calculating the Costs of
Defined Cost Objects
The final stage of ABC calculation involves
working out the costs of defined cost objects.
The objective of this phase is to quantify the num-
ber of activity units consumed by individual cost
objects. This calculation is performed on a bill of
activities this being a description of the “journey”
a product (or another cost object) makes throu-
gh the various activities en route towards com-
pletion. It is of great importance to accurately
work out the multiple cost drivers concerned and
to construct an intelligible costing statement for
different types of users.
4. Discussion
Utilization of the ABC system in companies in
the manufacturing industry with similar producti-
on to that presented in our case studies brings
some specifics. Despite the relatively low portion
of overheads, which are allocated differently than
with an absorption costing system, the variations
in product and project costs may prove important
so as to produce better evidence of costs of in-
dividual operations’ activities. Implementation
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EKONOMIKA A MANAGEMENT
also showed that the ABC model applied in
the case studies was unnecessarily detailed for
costing purposes. Most of the activities could be
gathered together into several major cost pools
or activities. Nevertheless, the level of detail is
adequate for analyzing processes and activities.
Should the ABC system only be implemented
to improve the field of overhead cost allocation,
the benefits of the system would be debatable.
The same could be brought about by a much
simpler calculation system, but the effectiveness
of ABC’s principal use for allocating project ma-
nagement costs or those for a sales department
is undeniable.
The application of ABC or other more so-
phisticated costing systems in manufacturing
industries continues to be widely discussed by
academics and potential users. ABC implemen-
tations are much more common in the area of
services, as well as energy companies, telecom-
munications, and financial institutions. Manu-
facturers often consider ABC a rather unsuitable
tool, in addition to being very expensive and not
resulting in significant benefits. One reason for
this is that senior managers too often do not
think of ABC as a complex system, i.e. one used
not only for costing purposes, but also for many
other functions.
The principles defined above can be conside-
red as guidelines applicable for manufacturing
companies when implementing ABC. They are
quite general in nature so might also prove use-
ful in any situation where practical application
could be highly specific and differ from another.
Conclusion
The Activity-Based Costing system, whose
fundamental principles have been explained in
this paper, is central to Activity-Based Cost Ma-
nagement. Information provided by this system
boasts wider areas of application compared to
that of traditional costing systems. Besides the
more valuable quantification of costs allocated
to cost objects and the detection of relations
between cost consumption and operation, the
existence of different types of cost objects also
allows costs to be analyzed at differing levels of
managerial decisions.
Activity-Based Management methods have
a broad range of uses, permitting the empowe-
ring utilization of ABC information for a wide
strana 111
 EKONOMIKA A MANAGEMENT
variety of company functions and operations
such as process analysis, strategy support and
time-based accounting, monitoring wastage, as
well as quality and productivity management.
In addition to information outputs, which could
dramatically improve the quality of the decision
making process, it is also necessary to define any
disadvantages of the ABC/M system. Applying
this method requires higher costs and difficul-
ties could arise during its use due to the various
activities that can appear. The implementation of
ABC/M is a collective process and brings with it
new cost calculation rules whilst presupposing
a change of attitude and behavior.
The results of case study we performed show
an example of the system being utilized in the
processing industry, a characteristic of which is
a large portion of material costs. Implementation
showed that despite limited impact in the field
of overhead cost allocation, the benefits in the
areas of process and activity analysis meant it
proved a success.
The article is processed as an output of
a research project Methodology of the Activity-
-Based Costing system implementation and its
influence on the manufacturing industries effici-
ency registered by the Grant Agency under the
registration number 402/07/P296.
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Ing. Boris Popesko, Ph.D.

Tomas Bata University in Zlin
Faculty of Management and Economics
Department of Enterprise Economics
Mostni 5139
760 01 Zlin
Czech Republic
popesko@fame.utb.cz
+420 576 032 504

Doručeno redakci: 20. 7. 2009.

Recenzováno: 8. 10. 2009; 4. 12. 2009
Schváleno k publikování: 11. 1. 2010

E + M EKONOMIE A MANAGEMENT 1 / 2010 strana 113

 EKONOMIKA A MANAGEMENT

ABSTRACT

ACTIVITY-BASED COSTING APPLICATION METHODOLOGY FOR MANUFACTURING

INDUSTRIES

Boris Popesko

The subject matter of this paper is the detailed consequences of putting in place an Activity-
-Based Costing system and its structure within the manufacturing industry. Moreover, it defines
steps within ABC application, as well as analyzing the input and output information and data re-
quired for effective utilization of the system. The close bond between cost allocation methodology
and application procedures is also determined within this work, thereby describing all the features
necessary for effective ABC implementation.
The results published herein come from research projects run over a 3-year timeframe, ones
focused on the methodology of implementing an Activity-Based Costing system and its resultant
influence on the efficiency of manufacturing businesses. The author has conducted a number of
ABC system applications in manufacturing industries in order to gather the data and information
necessary to define application and allocation principles.
The paper reveals two final outcomes. The first of these determines the methodology of building
an ABC system, looking at the essential steps necessary to construct a system in an organization.
The other describes cost allocation methodology, which is performed within separate stages of
implementation.
The major part of paper is dedicated to explaining the methodological steps within ABC implan-
tation, which include a feasibility study and review, activity and cost object definition, assigning
costs to activities, defining the appropriate cost drivers for individual activities, determining the
output measures for individual activities, calculating the primary rates of individual activities, assig-
ning the costs of support activities to primary activities, and calculating the costs of defined cost
objects.
One important issue that determines the eventual form and structure of the ABC system is
senior managers’ demand for data utilizable for decision making. All these requirements need to
be defined in relation to the structure of the system. An effectively implemented Activity-Based
Costing system then provides accurate product costing and proves a useful aid for managing bu-
siness operations. In the final part of paper, the results are discussed according to the all features
of ABC application in the manufacturing industry.

Key Words: Costing methods, activity-based costing, ABC implementation, cost allocation.

JEL Classification: M1; M41.

strana 114 1 / 2010 E + M EKONOMIE A MANAGEMENT

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